The yule tide rally appears to be in full swing with a few days to the yearend, equity markets have survived fears of a US recession in early February, a vote by the UK to leave Europe, the election of a new president and a sharp bond sell off. The FTSE 100 is once again close to 7000, a barrier it breaks above, before suffering from altitude sickness. At the start of the year fund managers were once again consensually overweight Europe, underweight US equities. The Euro Stoxx index of leading companies is unchanged year to date, the S&P 500 up over 10%. Banks and commodities were the big sector underweights at the start of the year, despite fund managers seeing these sectors as undervalued. Another call that has not panned out as anticipated.
The Federal Reserve prepared the market for four rate rises at the start of the year. Later this week we will discover if the Fed raise rates just once this year. The ECB on Thursday announced that they will extend the bond purchase program, but reduce the monthly amount they buy, by 20 billion euros a month. Some analysts saw this as an effective tapering of monetary policy.
Equity sentiment has improved significantly over the past few weeks. On example of this is the Put/Call ratio. This ratio is an indicator that shows put volume traded relative to call volume. A ratio above 1 indicates more buying of puts than calls, and a number below 1, the reverse. According to the Central Board Options Exchange the current total put/call ratio is 0.82. Another example is the AAII retail investor survey which currently has 43% of those asked think the market will be higher in 6 months’ time. Optimism is above 40% for a fourth consecutive week, the longest such streak in nearly 2 years.
Post the rate announcement on Wednesday, Janet Yellen will face the press. It is possible, if expectations of a rise are met, this meeting may make more headlines than the announcement itself. Having only raised once against the Fed forecast of four at the start of this year it is possible the tone could be more hawkish than the market currently expects. It is possible a more hawkish Fed may temper some of the bullish market sentiment.
The Bank of England and the Bank of Switzerland also have meetings this week. There has been some speculation the Bank of England could lower rates by another 10bp. Our belief is that as the UK economy remains resilient, at least at present, and the pound recovering, there is little reason to change policy either way now.
The Bank of Switzerland continues to struggle with a strengthening currency, particularly against the euro. Swiss interest rates are likely to remain at -0.75%. It would be unlikely they would wish to move rates into further negative territory, and raising them would run the risk of further strengthening the Swiss Franc.